The True Value of Paytm

Nov 22, 2021

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'Poor Vijay Shekhar. The guy couldn't hold back his tears after the poor listing of Paytm', my father-in-law told me over piping hot tea the other day.


I guess he has misread the situation completely. Those weren't the tears of disappointment or sadness by any stretch of imagination. He was in fact shedding tears of joy on his dream eventually coming true.

And why not. Keeping the IPO debacle and the entire brouhaha around it aside, it's indeed commendable that a guy born in Aligarh, UP, has worked day and night to build a Rs 1 lakh crore company.

As a value investor, I may have issues with the profitability of the company and its obscene valuations.

But Vijay Shekhar and his team have certainly built something that is adding a lot of value to the society and something that all of us should be proud of.

Now, getting back to the listing, it certainly was a disappointment and a big one at that.

You don't expect one of the poster boys of the new age Indian Unicorns to have a poor outing right on the listing day. It doesn't augur well at all for investor confidence.

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The stock has already eroded Rs 350 bn worth of shareholder wealth on the first day itself. And to make matters worse, the share price could slide even more from here.

How much further? Well, no one has any idea to be honest. But when any stock goes down in price, especially the one as big as Paytm, it does arouse the interest of a true-blue value investor.

If Paytm shares was overpriced at its IPO price of Rs 2,150 per share, has the 27% crash on the listing day corrected the overvaluation to some extent? Or does it need to fall further to a level where value investors would be more comfortable buying and recommending the stock?

Let's try and find out.

My calculations tell me that post the IPO, the company's book value per share would climb to around Rs 230-235 per share. So, how about buying the stock only when it falls to Rs 200 per share?

After all, theoretically, you can't lose any money if you are buying a stock at below its book value because any decent stock is at least worth its book value.

But the problem is that the stock won't trade anywhere close to its book value anytime in the near future.

Valuing companies based on book values is old hat. It's meant for those stodgy brick and mortar businesses that put up huge capacities on thousands of acres of land.

Asset light, tech companies like Paytm should never be valued that way.

For deep value investors like Ben Graham, or even Walter Schloss for that matter, Paytm does not fit the bill. It will always trade at a huge premium to book. So the stock is well outside their circle of competence.

We must come up with a different way of valuing the company.

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How about earnings power or earnings capacity? Just as bond has a coupon, a company has earnings. The only difference is unlike coupons, earnings may keep varying based on the business cycle.

A way out of this is to consider the average earnings say over a historical 5-year or a 7-year period.

Unfortunately, Paytm is still loss making. It has recorded a loss in each of the last three financial years. And you can't value a company using its earnings power if the earnings themselves are non-existent. Thus, even this method of valuing the company comes a cropper.

I see another batch of value investors dropping off at this juncture. These investors like to see a stable if not growing historical earnings profile. A company should be profitable for at least the last five years if not more before they even start considering evaluating it. And if this is not the case, they simply give it a pass. So, off they go.

Now, another difference between a bond with a fixed coupon and the earnings of a company is that the latter can keep going up year after year. Therefore, if the company is not profitable right now, it can certainly be so in the future.

Can Paytm be valued by assuming it's going to be eventually profitable and this profit number is around the corner and it's going to be so high it makes the stock attractive?

Well, this is where the matter starts to slip out of our hands. This is when things move into a darker place, from the realm of investment and into the realm of speculation.

Intuitively, you know that unless you do a deep dive into the company and know it like the back of your hands, you won't be able to crack this puzzle.

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Are you sure you have the chops for this? Are you willing to burn the midnight oil and find that one unique insight that makes you think Paytm is going to be a multibagger from here?

Maybe not.

What further makes your job difficult is that there're hundreds of super smart and super hard-working analysts out there who are right now doing the same thing. So, good luck competing with them.

You see, you are on far safer ground when you are buying something below book value or something that has a long history of profitable operations. In fact, you shouldn't mind paying a small premium, than you would otherwise pay, if the company has shown consistent growth.

But none of this is true in the case of Paytm.

Make no mistake, you can go wrong buying a stock below book value or paying a modest PE ratio. However, if you make 15-20 such investments across decent businesses in a growing economy like India, then you know that on a portfolio level, you can still end up making decent money.

But make 15-20 investments of the Paytm kind and suddenly you will need luck to play a bigger role in helping you make money than skill or discipline.

Truth be told, you need some luck to go your way in any stock that you pick. However, I prefer situations where luck plays a sub-ordinate role and is not the boss.

In the case of Paytm though, you will need a lot of luck to improve your prospects of making good money. If a research report by Macquarie is to be believed, that stroke of luck could come in the form of an ability to monetise UPI, which the firm believes could completely swing the investment case.

But both the timing of this directive as well as its magnitude remain shrouded in mystery.

Thus, to cut a long story short, there aren't any dependable means of valuing the company as far as I am concerned. By dependable, I mean something that's tangible and in the now.

Of course, there a lot of data points that you can fiddle around with and cobble together some kind of value for the company.

But as Einstein said, everything that can be counted, does not necessarily count; everything that counts cannot necessarily be counted.

Happy Investing!

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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